The intriguing proposal that young offenders should be sent to "academies" is at the heart of a compelling new report that looks for an alternative to the fractured and dysfunctional youth detention system. The report argues that a pilot academy, built in east London for local youngsters, should combine custodial and community facilities, including an intensive fostering programme, bail hostels and a pupil referral unit - all on the same site.

The idea is that those youngsters sentenced to custody will receive continuity of care, of education support, and of treatment, something denied them under the present system, where convicted children are routinely held hundreds of miles from their families.

The report is the result of a six-month study for East Potential, a charity specialising in providing accommodation, training and employment for disadvantaged young people in east London. The study showed that in December 2007, 186 east London youngsters were in custody in 20 different establishments, from Durham in the north-east to Exeter in the south-west; just under one-fifth were held in the nearest young offender institution, Feltham, over two hours away by public transport.

The causes of this scattergun approach to the placement of young, often vulnerable, children are varied, but cost is undoubtedly a factor. The youth justice budget is managed centrally by the Youth Justice Board, and when a child is sent to custody by a local authority, it is usually a free service. Children may have been costing the authority a lot of money - for placing them in a children's home - and resources, but under the present system, those sent to custody are off the authorities hands - at no cost. If the budget were held locally - as the report suggests - there would be a strong financial incentive to avoid custody.

The idea of community prisons - which is what the academies will be - is far from new. In 1990, in his report on the Strangeways prison riot, Lord Justice Woolf urged the setting up of community jails, with "greater emphasis being placed on the prisoners' return to the community". Woolf argued for keeping prisoners near their homes and in touch with all the services that local authorities provide. His proposals made sense then, and do so even more now, with prisons bursting at the seams and reoffending rates obscenely high. Nowhere is this failure more evident and costly than in the area of youth crime, where four out of five youngsters released from custody go on to reoffend.

Lord [David] Ramsbotham, who was a member of the academy steering group, hopes for a debate on its content and on issues arising from the government's publication of their youth crime action plan this summer. If it goes ahead, the academy could be up and running by 2012.

In an ideal world, we would be closing down children's prisons instead of opening new ones. But the depressing expectation is that this country will continue to be top of the European league in the ghastly game of putting children behind bars. Given that prospect, the type of establishment proposed in this report would be a massive improvement on the status quo. It is hoped that ministers pay it the attention it deserves.

· Eric Allison writes on criminal justice. His novel, The Last Straight Face, co-written with Bruce Kennedy Jones, is published by Old Street, £11.99. Young Offenders in East London is available at east-potential.org.uk